How well is the American consumer holding up against sky-high inflation? It depends on who you ask.
Four major retailers – Walmart, Target, Home Depot and Lowe’s – reported quarterly financial results this week, and each offered different perspectives on where and how people spend their money.
Walmart said some of its more price-sensitive customers are starting to trade to private labels, while Home Depot has highlighted the resilience of its customer base, a significant percentage of which are professional builders and contractors.
The reports came after Amazon showed alarming signs for retailers in late April, when it recorded the slowest revenue growth of any quarter since the dotcom crash in 2001 and offered a bleak forecast.
However, expectations on Wall Street were higher this week for Walmart and Target. Analysts and investors did not expect the two major retailers to have such a strong impact on their profits in the recent period, as supply chain costs weighed on sales and unwanted stocks such as TVs and kitchen appliances accumulated. Walmart closed on Tuesday at 11.4%, the worst day since October 1987. On Wednesday, Walmart fell another 6% in auction in the afternoon, while Target was also at a pace to have the worst day in 35 years.
In recent weeks, however, Home Depot and Lowe’s have gained more power among shoppers.
“Our customers are resilient. We don’t see the sensitivity to the level of inflation we originally expected,” Home Depot CEO Ted Decker said in a company earnings report on Tuesday. (Shares of both home improvement networks fell more than 5% in trading on Wednesday afternoon amid wider market sales.)
The mixed comments of these retailers are largely due to the fact that Americans experience economic volatility differently, depending on their income level. Companies and consumers are in an unexplored transition period after months of blocking measures related to Covid that have prompted purchases of canned goods, toilet paper and Peloton bikes. Several rounds of stimulating dollars pushed up spending on new sneakers and electronics.
But as this money dries up, retailers need to navigate the new routine. This includes inflation at its 40-year high, Russia’s war in Ukraine and the still crippled global supply chain.
“Although we have experienced high inflation in our international markets for many years, inflation in the US, which is so high and moving so fast, both in food and general commodities, is unusual,” the chief said on Tuesday. Walmart CEO Doug McMillon on revenue. conference.
This week’s results could portend challenges for a number of retailers, including Macy’s, Kohl’s, Nordstrom and Gap, who have yet to report results for the first quarter of 2022. These companies are counting on consumers coming to their stores to spend on new clothes or shoes may be under particular pressure, as Walmart has hinted that shoppers are starting to give up discretionary goods to shell out more money for products.
At the same time, retailers are citing growing demand for items such as luggage, dresses and makeup as more Americans plan vacations and attend weddings. But the concern is that consumers will be forced to compromise somewhere to afford these things. Or they will look for discounted items at stores like TJ Maxx.
Here’s what Walmart, Target, Home Depot and Lowe’s say about the state of the American consumer.
Walmart sees an ambiguous picture shaped by consumer household incomes and how they relate to the future. But in the last quarter, the country’s largest retailer said buyers are showing that they remember the budget.
Buyers left the stores and left the seller’s website with fewer items purchased. Most of them missed new clothes and other common goods as they saw rising prices for gas and food. Some traded for cheaper brands or smaller items, including half a gallon of milk and store-bought meat instead of the more expensive brand, CNBC chief financial officer Brett Biggs said.
On the other hand, he said, some customers were reaching for new patio furniture or looking forward to a new bright game console, he said.
“If you look at the demographics of the United States and put our customers on the map, we would be very close to that,” Biggs said. “And so you have some people who will feel more pressure than others, and I think that’s what we see.”
Target said he sees a sustainable consumer who has new priorities as the pandemic becomes an increasingly belated thought.
“They’re moving from buying TVs to buying luggage,” CEO Brian Cornell said in an interview with CNBC’s Squawk Box. He later added that “they still go shopping, but they started spending dollars differently.”
That change was reflected in purchases in the first fiscal quarter, he said. Customers purchased decor and gifts for Easter and Mother’s Day. They organized and attended big children’s birthdays, which led to a jump in toy sales. They also bought fewer items such as bicycles and small kitchen appliances when booking flights and planning trips.
Cornell noted the high level of spending Target opposed in the first quarter of last year because Americans received money from incentive checks and had fewer places to spend it.
Comparative sales were still growing despite this challenging comparison, he noted. In addition, traffic in the Target store and on the website grew by almost 4% for the year. Sales growth figures, however, will include the effects of inflation, which makes everything from freight costs to groceries more expensive.
Last quarter, Target also had higher mark-ups, a staple retail product that more or less disappeared during the pandemic as shoppers had a big appetite to buy and retailers had fewer goods that could be put on the shelves.
On Tuesday, the entrepreneur of goods for housing improvement told investors that he did not see any differences in consumer behavior.
The average Home Depot ticket rose 11.4% for the quarter, largely due to inflation. But executives also said consumers are trading up, not down. For example, according to Jeff Kinner, vice president of merchandising at Home Depot, consumers are switching from gas lawn mowers to more expensive battery-powered options.
This behavior is probably due to the fact that the vast majority of Home Depot customers are homeowners who have seen an increase in the value of equity over the past two years. Chief Financial Officer Richard McFaul said during the call that more than 90% of self-employed customers own their homes, while basically all sales to contractors are made on behalf of the homeowner.
McPhail also said about 93% of mortgage customers have fixed rates. As interest rates and housing prices rise, consumers who are considering relocating choose instead to stay in their current homes and rebuild them.
Lowe echoed similar sentiments during a conference call on Wednesday. CEO Marvin Ellison said rising house prices, aging homes and persistent housing shortages are key economic factors in Lowe’s business.
“This is one of the reasons why I believe that home improvement is a unique retail sector and can have a macro-environment where there are many questions about consumer health,” he told analysts.
Consumers working on DIY projects account for about three-quarters of Lowe’s sales, more than rival Home Depot. So far, the company has not observed any trade in materials from these consumers.
However, consumers are beginning to feel oppressed by rising energy prices. Allison told CNBC that Lowe’s customers trade on cordless tools for landscaping and lawn mowers and more economical washing machines.
“I think it has to do with fuel prices? The answer is clear,” he said.
Lowe’s didn’t really live up to Wall Street’s expectations regarding its quarterly sales, but executives counted disappointing retail performance with the weather.